Analysts from CGS-CIMB Research, DBS Group Research, Maybank Securities, OCBC Investment Research and RHB Group Research are maintaining their “add” or “buy” calls after Raffles Medical Group (RMG) posted strong results for the 1HFY2022 ended June. The group’s earnings, which surged 51.3% y-o-y, surpassed consensus estimates.
PhillipCapital is also recommending investors “buy” into the counter after upgrading its recommendation from “neutral” in its Aug 3 report.
In his report, Chew was all positive on the counter, highlighting its “resilient revenue” despite the lower Covid-19-related revenue, the surge in operating margins, the growth in China despite the lockdowns and the surge in operating cash flow.
On this, the analyst has raised his target price to $1.46 from $1.27 previously as he ups his FY2022 earnings estimates by 60%. The increased earnings peg accounts for an 18% increase in RMG’s revenue and a 5% increase in margins. His weighted average cost of capital (WACC) was also nudged up by 0.4% points to 7.5% to account for the higher risk-free rate.
“We expect 2HFY2022 revenue to be resilient, supported by foreign patient admissions, return of elective treatments, price increases and increased visits to general practitioner (GP) clinics. The revenue drag will come from lower Covid-19 related services such as vaccination, testing and community treatment facilities (CTF). We believe losses in China will persist as Shanghai operations ramp up capacity and cost,” he writes.
In addition to his “add” call, CGS-CIMB analyst Tay Wee Kuang has also raised his target price on RMG to $1.50 from $1.27 as he sees RMG’s Singapore operations “firing on all cylinders”.
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“The exceptional earnings despite expectations of tapering Covid-19-related contributions were a result of stronger local demand for healthcare and recovering contributions from foreign patients, in line with the pace of border reopening,” Tay writes.
“New businesses could also arise from management of Covid-19-related facilities that are re-purposed for non-Covid usage,” he adds.
Following RMG’s higher-than-expected results, Tay has upped his earnings per share (EPS) forecasts for the FY2022, FY2023 and FY2024 by 43.0%, 27.5% and 40.5% respectively.
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The way he sees it, RMG’s China assets reaching breakeven earlier than expected is a catalyst while the premature closure of CTF operations is a downside risk.
DBS analyst Rachel Tan has upped her target price slightly to $1.64 from $1.63 as she hails another record-breaking year from RMG.
“We applied the historical -0.5 standard deviation (s.d.) P/E (from 2012) of 26x to FY2022 earnings, plus 20 cents per share for its hospitals in China,” she says of her new target price.
In her report dated Aug 2, Tan sees the strong return of foreign patients as likely to continue, as well as the return of elective procedures, as previously expected.
“Given the company’s record-high FY2021 results, we expect earnings to stay elevated, despite China hospitals’ gestation losses, with some pent-up demand coming in from postponed elective procedures and foreign patients,” she writes.
“We remain the most positive among the consensus with a street-high target price. Our FY2021-FY2023 earnings estimates are one of the highest vs. the consensus, as we expect earnings to stay elevated, given the recovery of elective procedures and the return of medical tourism, while we await positive contributions from Raffles Hospital Chongqing and the rebound post the China lockdowns,” she adds.
In his Aug 2 report, Maybank Securities analyst Eric Ong has lifted his target price to $1.57 from $1.50 previously as RMG’s results “strongly exceeded” expectations.
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RMG’s primary care clinics showed that they were the beneficiaries from the reopening measures, as 1HFY2022 revenue grew by 11.2% y-o-y to $382.3 million, Ong notes.
On this, Ong has raised his EPS estimates for the FY2022 to FY2024 by over 30% driven by higher contribution and margin from RMG’s healthcare services segment.
However, he sees RMG’s EPS for the FY2022 as likely to decline on lower Covid-19 related services, but the improving local patient load at its clinics should help to offset some of the adverse impact, he says.
The research team at OCBC is the only brokerage among the list of analysts here to lower their target price to $1.50 as its discounted cash flow (DCF) model reflects a higher bond yield assumption and a more modest softer recovery outlook.
The brokerage had previously pegged a target price of $1.65 as at July 19.
“We continue to expect moderating Covid-19 related revenue contribution domestically as re-opening momentum continues to underpin Singapore’s move towards an endemic state although this should be mitigated by a recovery of medical tourism into Singapore over the medium-term driven by improving regional mobility,” the team writes.
That said, it sees an improving recovery outlook in tandem with ongoing economic re-opening efforts in Singapore.
Medium term catalysts for RMG could come from a gradual recovery in foreign patients into Singapore and easing pandemic impact on its hospitals in China into 2023, adds the team.
“The company has transited to an annual core dividend guided at up to half its average sustainable dividend. Raffles Medical has a steady rating since March 2019 for its environmental, social and governance (ESG) track record, which pegs it at the higher end of global industry ratings,” it continues.
RHB analyst Shekhar Jaiswal has lifted his target price to $1.65 from $1.50, which is the highest among the brokerages here.
In his report, the analyst sees a normalised healthcare business, higher foreign patient load and higher revenues from China should offset some of the tapering off of Covid-19-related revenue.
“We expect earnings to grow by 25% this year,” he writes.
“We lift FY2022 net profit by 29% and FY2023-FY2024 earnings by 3%-12%. Its valuation remains compelling [as it is] trading below peer average,” he adds.
However, the analyst warns that it may be difficult for the group to maintain profit at similar levels, noting 1HFY2022’s “stellar” earnings.
“Normally, RMG’s 2H revenue and profit tend to be higher than that of 1H. While we believe 2HFY2022 revenue will be higher than that of 1HFY2022, profits may come in lower amidst higher staff costs, increased operating expenses related to the higher patient load in Singapore and the gradual ramp-up of operations in China,” he writes.
As at 1.58pm, shares in RMG are trading flat at $1.33.
